Banks to sink or swim with re­moval of rate caps

China Daily (Hong Kong) - - BUSINESS DIGEST - By GAO CHANGXIN in Shang­hai gaochangxin@chi­nadaily.com.cn

De­posit and loan mar­gins will likely nar­row, though not as much as ex­pected, af­ter the cen­tral bank re­moved a cap on de­posit rates as part of its in­ter­est rate lib­er­al­iza­tion, cen­tral bank gov­er­nor Zhou Xiaochuan told Cai­jing mag­a­zine on Tues­day.

Zhou said loan rates likely will rise, along with de­posit rates, but un­cer­tain­ties re­main as to whether the rate mar­gin will widen or nar­row.

What is cer­tain is that af­ter the lib­er­al­iza­tion, risk premi­ums will stay lit­tle changed across sec­tors, and money will be spent more ef­fi­ciently.

Zhou’s com­ments came af­ter Bei­jing wrapped up its an­nual Cen­tral Eco­nomic Work Con­fer­ence. A com­mu­nique is­sued in the wake of the meet­ing listed in­ter­est rate lib­er­al­iza­tion as one of the six top eco­nomic pri­or­i­ties for next year. In its 60-point blue­print guid­ing China’s re­forms over the next decade, Bei­jing promised the lib­er­al­iza­tion will be com­pleted by 2020.

The Peo­ple’s Bank of China, the cen­tral bank, has been loos­en­ing its con­trol over in­ter­est rates in re­cent years as a key part of China’s broader mar­ke­to­ri­ented fi­nan­cial re­form. The last re­main­ing con­trol is a ceil­ing on de­posit rates, which an­a­lysts be­lieve dis­torts fund pric­ing and shel­ters banks from com­pe­ti­tion.

The av­er­age in­ter­est rate mar­gin at Chi­nese banks was 2.63 per­cent at the end of Septem­ber, ac­cord­ing to China Bank­ing Reg­u­la­tory Com­mis­sion data.

The rate was up slightly over the 2.59 per­cent seen in the pre­vi­ous quar­ter.

Zhang Qi, an econ­o­mist with Haitong Se­cu­ri­ties Co Ltd, pre­dicted lenders would strug­gle in the post-lib­er­al­iza­tion era.

“For lenders, mak­ing money will not be as easy,” he said.

Zhou said that, bar­ring a cri­sis, the cen­tral bank has no in­cen­tive to give fi­nan­cial in­sti­tu­tions any spe­cial treat­ment, in­di­cat­ing that it won’t shel­ter banks that are strug­gling to com­pete. “In nor­mal times, we hope banks will pro­vide bet­ter fi­nan­cial ser­vices to the so­ci­ety through com­pe­ti­tion.”

A thin­ner in­ter­est rate mar­gin likely will take a toll on Chi­nese lenders, whose bal­ance sheets al­ready are laden with bad loans stemming from China’s 4 tril­lion yuan ($654.12 bil­lion) stim­u­lus to save the econ­omy at the height of the fi­nan­cial cri­sis in 2008.

Chi­nese banks’ share prices al­ready had dropped last year, de­spite their healthy earn­ings, as in­vestors feared the ef­fects of in­ter­est rate lib­er­al­iza­tion.

The bank shares’ av­er­age price-to-earn­ings ra­tio, a key mea­sure of val­u­a­tion, is about 6, com­pared with 11 in the en­tire A-share mar­ket.

To help the State-owned lenders get through a rough patch, Bei­jing has been mak­ing ef­forts to strengthen its bal­ance sheets.

In Au­gust, Pre­mier Li Ke­qiang promised to ex­tend a pi­lot plan to sell bonds backed by bank loans. The bonds will be traded for the first time on ex­changes. The move is ex­pected to help banks un­load prob­lem­atic loans.

Last week, China Cinda As­set Man­age­ment Co Ltd raised 2.5 bil­lion yuan at its list­ing in Hong Kong, and a bulk of the money will be spent buy­ing up bad as­sets from the bank­ing in­dus­try.

Cinda is one of the four bad debt man­agers founded in 1999 by Bei­jing to clear up bad loans from China’s State-owned banks. The other three also are ex­pected to raise funds in the near term.

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